07/06/20184 mins

Monthly Commentary – May

May was a turbulent month in global asset markets. For sterling investors, however, a weak pound translated local currency declines into gains.

Much of the turbulence stemmed from European politics. In Italy, the unlikely populist pairing of the left-wing Five Star Movement and the right-wing Lega Nord struggled to form a government. Investors worried about the prospect of fresh elections, which would be seen as a referendum on European Union membership. The deadlock appeared to be broken on the last day of the month, as President Mattarella finally approved the coalition’s revised list of ministers. In Spain, meanwhile, Mariano Rajoy’s premiership looked set for an ignominious end as he faced a no-confidence vote over allegations of corruption in his People’s Party.

There was a short-lived respite in global trade tensions when US Treasury Secretary Steven Mnuchin declared that the trade war with China was “on hold”. But hostilities soon broke out again, with talk of new import taxes on automobiles. The US’s imposition of tariffs on steel and aluminium imports provoked retaliatory measures from the EU, Canada and Mexico. Meanwhile, President Trump declared that he was cancelling the planned summit with President Kim Jong-un, citing hostility from the North Korean regime (but true to form, the meeting was later reinstated).

Helped by a more dovish tone from the Federal Reserve, the US stock market shrugged off global uncertainties to lead the world’s markets up over the month. Political concerns weighed on European shares, which registered a modest decline. Latin America was by far the weakest region, as truckers’ strikes paralysed the Brazilian economy and Argentina was forced to seek financial aid from the International Monetary Fund.
Information technology was the strongest area of the market, as some investors saw it as less susceptible to the economic fallout from the various geopolitical tensions. The weakest sector was telecoms.

Rats, rather than the computer mouse, drove one of our strongest performers in May: Rentokil Initial. The UK listed pest control specialist endured a disastrous period from the late 1990s and through much of this century, with a succession of new CEOs and profit warnings. The current CEO, Andy Ransom, took over in 2013 after the previous incumbent failed to turn the company’s fortunes around. Backward-looking investors still tend to judge Rentokil Initial on its past record. But after disposing of non-core assets, the company has refocused on its core area of pest control – a growing and stable market that benefits from increasing regulation and rising wealth worldwide. We attended the company’s investor day in May, at which Mr Ransom highlighted the size of the opportunity in the US, where they are consolidating their position by acquiring smaller competitors.

Rentokil Initial is one of our “more to come” investments; its shares have performed very well since our initial purchase, but we believe investors have not yet fully appreciated the improved prospects for the company. We continue to seek out unfashionable opportunities that offer the prospect of similar share price recoveries.

May 2018

*As at 6 May 2018

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.

Investment trusts are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.

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